The Rating Game: The Analyst Who Saved Investors Money - TheStreet

The Rating Game: The Analyst Who Saved Investors Money

Ed Comeau's prescient call on CVS saved about $17 a share. Plus, AirTran Holdings wrangles with an analyst over its downgrade.
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Two weeks ago,

Credit Suisse First Boston's

Ed Comeau downgraded

CVS

(CVS) - Get Report

to hold, arguing that a recently concluded survey of the company's labor force found the pharmacy department was understaffed and sales were suffering. Soon after,

as mentioned here last week,

Lehman Brothers'

Meredith Adler came out and defended CVS, telling investors the pharmacy staffing issue was an industrywide concern, not just a CVS issue.

Smile, Ed Comeau, you made the right call. On Wednesday, CVS warned that 2001 EPS would miss analyst estimates. The next day, Adler cut her price target on CVS to $45 from $66, citing the very same pharmacy staffing issues Comeau brought up in the first place.

Comeau saved investors about $17 a share, if you count the difference between the stock's close when he made the downgrade ($54.49) to where it closed in yesterday's action ($37.79). Nice.

General Sherman, Part Two: Airlines and an Analyst Battle Over Atlanta

You'd almost have a better chance of seeing megabull Abby Joseph Cohen carting around a sign that read "Liquidate Your Assets" than you would seeing a sell rating issued by a sell-side analyst. So when

UBS Warburg's

Jamie Baker cut

AirTran Holdings

(AAI)

to reduce, a form of sell, from hold last Friday, investors put the stock down like a sick pet. The low-cost regional airline, known as

ValuJet

before it acquired

AirTran Airways

, fell 16.3% that day as investors followed Baker's advice to sell.

In the crowded air travel space, where a pricing war rages as regional airlines attempt to undercut larger players that are already undercutting each other,

Delta

(DAL) - Get Report

introduced new low business fares in the Atlanta area -- striking a blow to the heart of AirTran's operation, whose hub is located there. Baker saw the news as trouble for the airline, whose stock is up 28% year to date as of yesterday's close.

"AirTran is a quality low-fare growth airline. However, last time this week, AirTran was a quality low-fare growth with an unprecedented pricing advantage. Now that has disappeared," Baker said in an interview.

In his view, Delta's decision to allow for one-way ticket pricing at a reduced rate with no Saturday stay represented a "material change" in pricing policy, and one that Delta likely won't alter anytime soon. As a result, Baker thinks the real carnage will come next year and he set his 2002 EPS estimate 41 cents lower than the current consensus, making him the most bearish analyst on the stock.

"The prior inclusion of a Saturday night stay-over prevented

the typical business traveler

from obtaining the best-priced fares," Baker said. "Before this change, a Delta ticket would have cost you in excess of $1,000, round trip. Today you can do that for under $500. Forty percent of AirTran's revenues come from fares that have just come under pricing pressure."

The major point of contention, naturally, is whether Delta will keep those lower price points for a long period of time, as Baker suggests, or whether this is just a short-term thing. Not everyone, especially AirTran's management, agreed with the call. Both

Raymond James'

Jim Parker and

ABN Amro's

Raymond Neidl reiterated their buy ratings on the stock in notes this week. In a conference call, AirTran stuck by its guidance for the second quarter.

AirTran spokesman Jim Brown said Baker was making "much ado about nothing" and deemed his sell call "premature," citing Delta's propensity for temporarily cutting rates only to restore a higher price later. He said AirTran had not seen any difference in advance bookings in the week or so since Delta changed its rates. "This is not a unique thing by any means."

But Jamie Baker said recent events prove that Delta is committed to fighting AirTran tooth and nail for the Atlanta market. On June 26, AirTran announced sale prices for all flights leaving its Atlanta hub, requiring no stay-overs of any kind and no round-trip fare purchase. Delta came back and matched the full terms of the deal, including the one-way fare pricing. "This is unusual," Baker said. "Before, when matching sales, Delta continued to require a Saturday night stay over. This action highlights its commitment to not be undersold in the Atlanta market."

This Week's Statement of the Obvious:

"The

Securities and Exchange Commission

has issued an investor alert urging investors not to rely solely on analyst recommendations when deciding to buy, hold or sell stock. Instead, investors should consult multiple sources of information while considering their own investment goals and tolerance for risk."

The SEC, from the opening paragraph of a press releasing advising caution about analyst ratings. (Where were these guys last year?)

They Are the Weakest Link! Goodbye

Hard-core

Federal Reserve watchers use a combination of economic barometers, seasonally adjusted data points and old-fashioned gut instinct to handicap the central bank. And on Wednesday, when the

Federal Open Market Committee announced it was merely making a 25 basis-point cut to the

federal funds rate, the first time it had not eased by 50 basis points this year, more than a few Wall Street oracles had read their chicken bones wrong.

So which of the following brokerages called the Fed's move to 3.75% correctly?

If you said

Bear Stearns

,

Goldman Sachs

,

J.P. Morgan Chase

, Lehman Brothers,

Merrill Lynch

or

Salomon Smith Barney

, you're just as wrong as they were. All six thought the Fed would cut by 50 basis points.

Here's a roundup of who nailed it and who blew the call: